By Gabriel Wildau and Lu Jianxin SHANGHAI, June 26 (Reuters) - China's financial markets werecalmed on Wednesday after days of turmoil by the central bank'spledge to prevent any lasting credit crunch, but stocks keptslipping as investors braced for tougher conditions in theworld's second-largest economy. The People's Bank of China (PBOC) said late on Tuesday ithad helped some banks and was ready to act again as the lenderof last resort for those caught in a short-term squeeze.However, it was also sticking to its stance of tightening marketconditions as it seeks to rein in sharp growth in informallending. The central bank wants to curtail funds flowing into China'svast "shadow" financial system that fuels property and stockspeculation and push money into more productive areas of theeconomy to secure more sustained growth. But its decision to allow short-term borrowing costs toshoot up to extraordinary levels last week fanned fears that atemporary squeeze could morph into a lasting credit crunch andhad roiled global markets. "Market sentiment has apparently improved somewhat, althoughthe PBOC is still expected to stick to relatively tightliquidity policy," said a dealer at a major state-owned bank inShanghai. The PBOC reiterated its warning to banks that they needed tomanage liquidity more carefully and protect against risks ofreliance on short-term borrowing, adding to expectations oftougher business conditions and possibly slower economic growth. So while most Asian share markets rebounded from a four-daylosing streak, taking comfort from encouraging U.S. economicdata and the PBOC assurances, shares in Shanghai were lower, again led by financial stocks which at one point were down well over 2 percent.

Money market dealers were relieved that a full-blown marketfreeze seemed to have been averted, but said fund flowssuggested cash would remain tight until mid-July. The benchmark seven-day repo rate opened downabout a quarter of a point at around 7.20 percent on aweighted-average basis on Wednesday, before inching up to 7.26percent, still well above the long-run average of 3 to 4percent.

END OF EASY CREDIT? The central bank said it would actively inject cash "basedon the market's actual situation" and would "adjust bankingsystem liquidity in a timely manner". The central bank's words and actions convinced a growingnumber of analysts that while the worst-case scenario of acredit freeze and banking crisis seemed distant, the era ofrapid growth fuelled by cheap credit was also over. "The policy stance will likely remain tight. The statementindicated that the PBOC will stick to 'prudent monetary policy',which suggests that credit growth will continue to decline inthe near term," Nomura analysts said in a note. "The PBOC also indicated that it would inject liquidity intofinancial institutions facing liquidity problems if thoseinstitutions 'help the real economy'. This supports our viewthat the PBOC will not tolerate bank failures," they said. The revelation that the PBOC had supported unnamedindividual institutions came after outages at automatic tellermachines and Point of Sales terminals at two of China's largestbanks caused concern among the public.